Disney Critics’ Own Roles Are Targeted at Ovitz Trial

For the last year, investor Roy E. Disney and his longtime associate, Stanley P. Gold, have crisscrossed the nation crusading for good corporate governance.

In making their pitch, they have chastised directors of Walt Disney Co. for serving as a mere rubber stamp for Chief Executive Michael Eisner. Leveraging their newfound celebrity, the two recently disclosed that they were trying to form a $1.25-billion investment fund aimed at promoting shareholder rights at other companies.

But now, Gold and Disney must answer allegations that, while serving on Disney’s board nearly a decade ago, they rubber-stamped with the best of them.

The finger-pointing will come in a Delaware courtroom, where the two men face hours of cross-examination from lawyers intent on showing that they were among current and former Disney directors who failed to properly monitor Eisner’s decision to hire and fire his old friend Michael Ovitz as company president.

The lawyers, representing Disney shareholders, blame a passive board for waving through Ovitz’s hiring in 1995, forcing the company to pay out an unnecessarily rich severance package 15 months later. The plaintiffs have valued the parachute at $140 million.

For Gold and Disney, the testimony probably will involve trying to reconcile their recent condemnation of Disney’s board with the carte blanche that they and other directors are alleged to have given Eisner in the past.

Indeed, some corporate-governance activists say the two men’s conduct as directors would not pass muster with the standards they preach now.

“They’ve painted themselves in a corner,” said Nell Minow, editor at the Corporate Library, a research firm. “They are guilty of everything they’ve ever accused the board of doing.”

Said Patrick McGurn, senior vice president of Institutional Shareholder Services, a proxy advisory firm: “To the extent that Stanley and Roy participated ... they are culpable.”

Gold and Disney declined to comment for this story, citing the pending litigation.

But they and other former board members have previously disputed the notion that they were asleep at the switch when Eisner picked his second in command.

During the time Gold and Disney served on the board, Business Week magazine twice labeled it the worst in the nation. That was partly because it was then stacked with people such as Eisner’s personal lawyer, his architect and the principal at his children’s elementary school.

Gold and Disney abruptly quit the Burbank entertainment giant’s board a year ago. They mounted a bitter fight to oust Eisner, citing poor financial performance, a lagging stock price and strategic missteps.

In his Dec. 1 resignation letter, Gold accused his fellow directors of acting as an “enabler to entrenched management,” adding that “the board should not merely be a rubber stamp.”

The campaign led by Gold and Disney is credited with forcing Eisner to give up his chairman’s title after the company’s annual meeting in March, and for pushing him toward retirement, which he has said will happen when his contract expires in September 2006.

Meanwhile, Disney has taken a number of steps to make its board more independent, drawing praise from corporate-governance advocates.

The shareholder lawsuit casts light on an altogether different period: when Gold and Disney were part of an elite inner circle of directors close to Eisner.

Court records show that this coterie of board members was more privy than others to information about key decisions, including details of Ovitz’s hiring. Consultations were often made in informal telephone calls to select members, including Gold, rather than in formal settings involving all of them.

Disney’s bylaws state that directors should hire executives at the level of company president. But court records show the full board did not meet to sign off on the initial terms of Ovitz’s employment agreement until more than a month after his appointment was publicly announced in August 1995.

Only then did the board formally meet to give its blessing to his hiring. Ovitz’s contract included a key no-fault termination provision that guaranteed a rich payout if he was fired without cause.

From the start, “this was a process that should have been led by the board” in its entirety, McGurn said.

“Instead, it was driven almost completely by the chief executive officer.”

In court Wednesday, Gold testified that he and Roy Disney were fully informed and supportive of the Ovitz hiring.

Gold said that although he knew bringing Ovitz to the company was going to be “big, large, expensive,” he was enthusiastic because the head of the powerful Creative Artists Agency had a strong reputation in Hollywood and deep ties to talent.

“I thought I was doing shareholders a great service by being part of the team that brought him over,” Gold said in court.

He downplayed the timing of the public announcement about Ovitz’s appointment, noting that it contained the caveat that the hiring was still subject to board approval. Gold also said he and Disney were briefed by Eisner before the news release was issued.

Beyond that, Gold testified, he had as many as 15 conversations with Eisner about recruiting Ovitz and carefully reviewed the terms of the new president’s employment agreement before the hiring was announced.

When things later went south, Gold said, the company’s top lawyer advised him that Disney had no basis to dump Ovitz and deny his severance.

The whole episode was “a huge mistake, a mistake we all made,” Gold said in an earlier deposition. But there were “no grounds to fire him and give him nothing.”